Lululemon Athletica Inc (LULU) — Q4 2024 Earnings Call Transcript

Thank you, and good afternoon. Welcome to Lululemon's fourth quarter earnings call. Joining me to talk about our results are Calvin McDonald, CEO; and Meghan Frank, CFO. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management's current forecast of certain aspects of Lululemon's future. These statements are based on current information, which we have assessed, but by their nature, are dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our annual report on Form 10-K and in today's earnings press release. In addition, the comparable sales metrics given on today's call are on a constant dollar basis. Press release and accompanying annual report on Form 10-K are available under the investors section of our website at www.lululemon.com. Before we begin the call, I'd like to remind our investors to visit our investor site, where you'll find a summary of our key financial and operating statistics for the fourth quarter as well as our quarterly infographic. Today's call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now, I'd like to turn the call over to Calvin.

Thank you, Howard. I'd like to welcome everyone to our fourth quarter call. I'm pleased to be here to discuss our results, which contributed to another year of growth at Lululemon, and also speak to our outlook for 2025. On today's call, I'll start with our performance in quarter four, which exceeded the revised guidance we provided in January, and I'll also share some key highlights on our annual performance. Next, I'll provide insights into our product innovation and the strength of our pipeline. I'll then detail our strategies to raise our brand awareness, which remains a significant opportunity for us globally. Meghan will then review our financials and provide our guidance for the first quarter and full year of 2025, then we'll take your questions. So let's get started. In quarter four, total revenue excluding the 53rd week, increased 8% or 9% on a constant currency basis. Operating margin increased 40 basis points to 28.9% and earnings per share increased 16%. In addition, in quarter four, we repurchased $332 million of stock, which brings our total repurchases in 2024 to $1.6 billion, which demonstrates our confidence in the long-term prospects for Lululemon. Shifting now to our full year 2024 results. Total revenue was $10.6 billion and excluding week 53, increased by 8% or 9% in constant currency. Adjusted operating margin increased 50 basis points to 23.7% and adjusted earnings per share increased 15%. Since 2021, which is the base year of our current Power of Three x2 five-year plan, we have grown revenue at a 19% CAGR, increased adjusted operating margin by 170 basis points, and grew adjusted EPS at a CAGR of 23%. This puts us ahead of our targets for all these key metrics as we enter the fourth year of our plan. I want to thank our teams across the enterprise for their ongoing dedication and commitment to our company. If it wasn't for this global collective, we would not be able to deliver these results. I'd now like to spend a few minutes discussing our product and sharing some highlights from our pipeline of innovation. In quarter four, we were happy with our performance across merchandise categories. Outerwear and second layers performed well for both women and men and within accessories, bags continued to be well-received. Overall, we were pleased with the guest response to the newness we brought into our core franchises for the holiday season. Looking at quarter one, we have increased our level of newness on par with the past. We believe this increase, along with a robust pipeline of innovation, will enable us to meet the expectations of our guests, and I'm excited about what the product teams are bringing to market this spring and throughout the year. We started the year strong with the launch of several new innovations. Glow Up is our newest technical franchise for women. Made from a new version of our proprietary Ultralu Fabric, the Glow Up Tight offers a smooth and sculpted fit designed to be used for a variety of training workouts. We also introduced a tank top and intend to expand the line in future seasons. Daydrift is our newest lifestyle trouser for women. Made from our Luxtreme Fabric, this casual pant offers technical features that provide superior comfort and versatility. Initial response has been very strong, and we've been selling out across several sizes and colors. The teams are chasing into it now, and we have several additions planned for later this year. Based on this response and performance, we believe Daydrift will become a new core franchise. And finally, there is BeCalm, the latest addition to our yoga assortment and offers incredible softness, a relaxed fit, and extreme comfort whether on or off the mat. These are just some of the recent product launches, which have been well received by our guests and demonstrate how we continue to innovate and bring newness into our core activities while also expanding our casual offerings. We're pleased with the positive feedback from guests, which is in line with our expectations and consistent with past successful product launches. And we are excited about our product pipeline, and I'd like to share a few examples. Within shorts for men, we recently launched a new run franchise called Mile Maker and will soon update license to train to further lean into this franchise opportunity. For women, we'll update Fast & Free with new seasonal styles and colors later this year, and will bring innovation into our Swiftly franchise, including a new run short. We'll introduce a new fabric called LuluLinen, which has the look and feel of linen and also includes some technical performance attributes we are known for. And we're excited about the plans we have in place to celebrate the 10th anniversary of our iconic Align franchise. We recently introduced the Align Palazzo Pant and will expand further with other new bottoms, including a legging with no front seam. Our guests have been asking for this innovation, and we believe this style, along with all the other newness and innovation we are bringing to market, will help drive new guest acquisition and increased purchase from existing guests as well. As you can see, our teams have been hard at work solving for the unmet needs of our guests, and we feel good about our product pipeline for 2025. Our unique approach to innovation is grounded in creating technical apparel with wide-ranging and adaptable use cases. The strength of our pipeline, along with seasonal updates to our core styles, brings newness into our assortment on a regular basis and helps drive guest loyalty, repeat purchases, and long-term value. I'm pleased with the styles we've launched so far this spring and I'm looking forward to the innovations lined up for the remainder of the year. Shifting now to brand awareness. Our teams have been delivering on our strategy to activate the Lululemon brand across several of our markets around the world, particularly in the U.S. We continue to focus on increasing our brand awareness, which remains low in nearly every market in which we operate. For example, our unaided brand awareness in France, Germany, and Japan is in single digits. In China Mainland, it's in mid to high-teens. In the UK and Australia, it's in the 20s. And in the U.S., unaided brand awareness is in the 30s. Increasing awareness and consideration is a meaningful opportunity. So I want to share some of the strategies we have in place to help us achieve this goal, including, first, the way we show up in our local communities through brand activations, local events, and with our membership program. Second, how we leverage relationships with our ambassadors, and finally, our global brand campaigns. Let's begin with our local community-based activations. These events allow us to engage directly with our guests in unique and exciting ways beyond a simple purchase transaction. Our activations are aimed at building loyalty with existing guests and attracting new guests into the brand. We've hit the ground running in 2025. Our teams have been busy bringing the Lululemon brand to life in several of our markets around the world, particularly in the U.S., where our opportunity to grow awareness remains significant. In February, we partnered with the Rock 'n' Roll Half Marathon in Las Vegas. We showed up in a big way along the strip with pre-race yoga, cheer stations on the course, co-branded product, and a takeover of the sphere. Next, to launch our newest franchise, we opened a Glow Up studio in SoHo, New York for two weeks across February and March. In addition to a launch party, we hosted a variety of sweat classes for guests, taught by several of our ambassadors, sought-after trainers, and local fitness instructors. In London, we celebrated our new collaboration with British fashion designer Saul Nash with a launch party during London Fashion Week. We also celebrated the opening of our newly optimized Regent Street store with a Lululemon takeover of the giant video screens and newsstands in Piccadilly Circus. And beginning in mid-March and finishing this week, we ran Membership Madness. This event included member-only access to in-store events, free classes at studio partners, and the opportunity to win entry to unique experiences we'll host throughout the year. This shows how we are innovating and testing premium ways to connect with our 28 million members and provide them with access to compelling and exclusive experiences. In addition to our activations, we continue to explore and strengthen our relationships with our global ambassadors as we start the year. I'm very excited about the new ambassadors we have introduced to start 2025, including PGA golfer Max Homa, professional tennis player Frances Tiafoe, and Formula One champion Lewis Hamilton. This elevated roster of ambassadors helps us connect with more guests, both existing and new, in market across the globe. In quarter one, we showed how we can leverage these relationships in many ways, including activations and expressions of fans support at the Phoenix Open Golf Tournament, Indian Wells Tennis Tournament, and Formula One races in both Melbourne and Shanghai. These are great examples of how we support our athletes as they compete, grow Lululemon's credibility and awareness across our growth activities, and allow our local teams to create fun and unique activations for our guests. In addition, these events, along with the high level of activations in this period, contributed to very strong reach and guest engagement in our own social channels to start quarter one. While our grassroots brand building strategies remain very important to us, we use global campaigns to reinforce our brand positioning and bring new guests into Lululemon. We recently launched our new brand platform Live Like You Are Alive with a campaign featuring 78-year-old fitness influencer Joan MacDonald. We'll use Live Like You Are Alive as a foundation for our messaging and will bring new creative into the narrative throughout the year. Upcoming chapters include the celebration of Align's 10-year anniversary in quarter two and a Run Focus campaign later in the year. Let me now spend a few moments on our U.S. business and share my perspective as we head into 2025. As I have shared before, the missed opportunity from last year was the level of newness across our merchandise mix. The teams worked with our vendors, chased into what was possible, and improved the penetration of newness in the second half of 2024. These efforts contributed to a stabilization in the U.S. business as the guests responded well to many of the updates we brought into the assortment. I would also note that importantly, our new guest acquisition and retention metrics remain strong, and our opportunity is to drive increased revenue per guest as we continue to bring newness and innovation into the mix. As you have seen, we started this year with several compelling new product launches, but we also believe the dynamic macro environment has contributed to a more cautious consumer. In fact, based on a survey we conducted earlier this month in conjunction with Ipsos, consumers are spending less due to increased concerns about inflation and the economy. This is manifesting itself into slower traffic across the industry in the U.S. in quarter one, which we are experiencing in our business as well. However, we see guests who visit us responding to the newness and innovations we brought into our assortment. We believe this is a positive indication as we continue to flow new product, engage with our guests through unique and compelling activations, and launch brand campaigns. We are controlling what we can control, and we expect to see modest growth in U.S. revenue for the full year of 2025. Before handing it over to Meghan, I'd like to highlight our square footage growth plans for 2025. Stores remain an important part of our growth story. Not only are they highly productive, but they are also hubs in our local communities and allow us to engage directly with our guests, which provides us with another important competitive advantage. In 2025, we plan to grow square footage by approximately 10%, which will be driven by new store openings and our ongoing optimization program. We will continue to open stores in existing markets and enter several new countries this year, including Italy, as a new company-operated market and Denmark, Belgium, Turkey, and the Czech Republic under our franchise model. In terms of our optimization strategy, a recent and compelling example can be seen in London with the relocation and expansion of our Regent Street store. This store which now spans 14,000 square feet offers the largest pant wall and men's assortment in Europe. As a destination for both residents and tourists, our new store offers a pinnacle expression of our brand, and we expect it will continue to help us attract new guests into Lululemon from the UK and across Europe. We have much to be excited about in 2025. However, as you're aware, the external environment remains dynamic and there continues to be considerable uncertainty driven by macro and geopolitical circumstances. That being said, we remain focused on what we can control. We've had a busy start to this year with product launches and event activations, and I feel confident with our plans for the remainder of the year. Meghan, over to you.

Thanks, Calvin. We delivered Q4 results that exceeded our January guidance update as we saw strength across the key components of the P&L, including sales, gross margin, and SG&A. These results contributed to another year of solid performance while acknowledging product opportunities we've discussed in our U.S. business. Key highlights in 2024 include revenue growth of 9%, excluding the 53rd week and in constant dollars, adjusted operating margin expansion of 50 basis points, and adjusted earnings per share growth of 15%. I'm proud we were able to deliver these strong results while continuing to invest in our strategic initiatives, including building brand awareness through our activations and brand campaigns, growing square footage by 14%, and returning $1.6 billion to shareholders through share repurchases. Looking at 2025, we are pleased with both the level and composition of our inventory as we enter the spring season, and we are seeing good guest response to newness and innovation we brought into our assortment. However, we also acknowledge the uncertainty in the retail environment as the consumer is navigating a dynamic macro environment. While we expect both top and bottom line growth for the year, we continue to be thoughtful in our planning. I'll take you through our guidance in a moment, but let me now share the financial details of Q4. For Q4, total net revenue rose 13% or 14% in constant currency to $3.6 billion. Excluding the 53rd week, net revenue increased 8% or 9% in constant currency, and constant dollar comparable sales increased 4%. Within our regions, excluding the 53rd week, results were as follows: Americas revenue increased 2% or 3% in constant currency with comparable sales flat. By country, revenue increased 11% in constant currency in Canada and increased 1% in the U.S. China Mainland revenue increased 38% or 39% in constant currency with comparable sales increasing 27%. And in the Rest of World, revenue grew by 22% or 26% in constant currency, with comparable sales increasing by 17%. In our store channel, total sales increased 13% on a constant dollar basis, excluding the 53rd week, and we ended the quarter with 767 stores globally. Square footage increased 14% versus last year, driven by the addition of 56 net new Lululemon stores since Q4 of 2023. During the quarter, we opened 18 net new stores and completed 16 optimizations. In our digital channel, revenue increased 8% and 4% excluding the 53rd week and contributed $1.8 billion of top-line or 50% of total revenue. And by category, excluding the 53rd week, men's revenue increased 12% versus last year, while women's increased 6% and accessories and other grew 9%. Gross profit for the fourth quarter was $2.2 billion or 60.4% of net revenue compared to gross margin of 59.4% in Q4 2023. The gross profit rate in Q4 increased 100 basis points ahead of our guidance and was driven primarily by the following: a 160 basis points increase in product margin driven predominantly by lower product costs, lower markdowns, and improved shrink, offset somewhat by higher air freight, a 30 basis points negative impact from foreign exchange, and 30 basis points of net deleverage on fixed costs. Relative to our guidance, which was for a gross margin increase of approximately 30 basis points, the upside was driven predominantly by leverage associated with higher top-line, prudent management of fixed expenses within gross margin, and foreign exchange. Moving to SG&A. Our approach continues to be grounded in prudently managing our expenses while also continuing to strategically invest in our long-term growth opportunities. SG&A expenses were approximately $1.1 billion or 31.5% of net revenue compared to 30.9% of net revenue for the same period last year. SG&A was better than our guidance of 80 basis points to 90 basis points of leverage due to higher top-line and foreign exchange. Operating income for the quarter was approximately $1 billion or 28.9% of net revenue compared to operating margin of 28.5% in Q4 2023. Tax expense for the quarter was $309 million or 29.2% of pre-tax earnings compared to an effective tax rate of 28.1% a year ago. The increase in tax rate relative to last year is due to a decrease in tax benefits related to stock-based compensation, an increase in non-deductible expenses, and an increase in profits outside of the U.S. Net income for the quarter was $748 million or $6.14 per diluted share compared to EPS of $5.29 for the fourth quarter of 2023. Capital expenditures were $235 million for the quarter compared to $207 million for the fourth quarter last year. Q4 spend relates primarily to investments that support business growth, including our multi-year distribution center project, store capital for new locations, relocations and renovations, and technology investments. Turning to our balance sheet highlights. We ended the quarter with approximately $2 billion in cash and cash equivalents. Inventory increased 9%, slightly lower than our guidance for an increase in the low-double-digits. We repurchased 938,000 shares in Q4 at an average price of $354. For the full year, we repurchased approximately $1.6 billion of stock. Share repurchases remain our preferred method to return cash to shareholders, and we currently have approximately $1.3 billion remaining on our repurchase program. Let me now share our detailed guidance outlook for the full year 2025. We expect revenue to be in the range of $11.15 billion to $11.3 billion. This range represents growth of 5% to 7% relative to 2024. Excluding the 53rd week we had in the fourth quarter of last year, we expect revenue to grow 7% to 8%. And as Calvin said, we expect revenue growth in the U.S. to be modestly positive for the year. I'd also note that we expect foreign exchange to have a negative 1 percentage point impact on our revenue growth rate for the year. We expect to open 40 to 45 net new company-operated stores in 2025 and complete approximately 40 optimizations. We expect overall square footage growth of approximately 10%. Our new store openings in 2025 will include approximately 10 to 15 stores in the Americas, with the rest of our openings planned in our international markets, the majority of which will be in China. For the full year, we expect gross margins to decrease approximately 60 basis points versus 2024. We expect the decrease will be driven by deleverage on fixed costs, FX headwinds, and the impact of increased tariffs related to China and Mexico. For the full year, we expect markdowns to be relatively in line with 2024. Turning to SG&A for the full year. We expect deleverage of approximately 40 basis points to 50 basis points versus 2024, driven by ongoing investments into our Power of Three x2 roadmap and FX headwinds. For the full year, we are planning investments in marketing and brand-building aimed at increasing our awareness in acquiring new guests, investments to support our international growth and market expansion, and continued investment in technology and data analytics capabilities. When looking at operating margin for the full year 2025, we expect a decrease of approximately 100 basis points versus 2024. While we remain thoughtful as we plan expenses, we also continue to invest in our strategic roadmap to enable future growth. As I mentioned, we are seeing headwinds from foreign exchange and tariffs, while also absorbing some additional costs relative to last year as we layer back in certain expenses, including store labor hours, travel, and incentive compensation. I would note that between 2021 and 2024, our operating margin increased 170 basis points, which is greater than our Power of Three x2 target of modest operating margin expansion annually. For the full year 2025, we expect our effective tax rate to be approximately 30%. For the fiscal year 2025, we expect diluted earnings per share in the range of $14.95 to $15.15 versus EPS of $14.64 in 2024. Our EPS guidance excludes the impact of any future share repurchases but does include the impact of our repurchases year-to-date. I would also note that FX pressure relative to last year is a $0.30 to $0.35 drag on EPS in 2025. When looking at inventory, we expect dollar inventory to increase in the high teens in Q1 as we anniversary last year's declines. We expect capital expenditures to be approximately $740 million to $760 million in 2025. This spend relates to investments to support business growth, including a continuation of our multi-year distribution center project, store capital for new locations, relocations, renovations, and technology investments. Shifting now to Q1. We expect revenue in the range of $2.335 billion to $2.355 billion, representing growth of 6% to 7%. The growth rate in Q1 is being negatively impacted by one percentage point related to foreign exchange. We expect to open three net new company-operated stores in Q1. We expect gross margin in Q1 to be approximately flat with Q1 2024. We expect a modest improvement in product margin, offset primarily by deleverage on fixed costs. Markdowns are planned to be relatively flat with last year. In Q1, we expect our SG&A rate to deleverage by approximately 120 basis points relative to Q1 2024. This will be driven predominantly by increased foundational investments and related depreciation and also strategic investments, including those to build brand awareness to support future growth. When looking at operating margin for Q1, we expect deleverage of approximately 120 basis points. Turning to EPS. We expect earnings per share in the first quarter to be in the range of $2.53 to $2.58 versus EPS of $2.54 a year ago. Our EPS guidance for the quarter includes approximately $0.06 of incremental negative impact from foreign exchange. We expect our effective tax rate in Q1 to be approximately 30%. And with that, I will turn it back over to Calvin.

Thank you for your time today. I am pleased with how we closed out 2024, delivering results that demonstrate our leadership, agility, and potential for growth. And I am proud of how we have started the year with new product innovations, collaborations, and a steady drumbeat of brand and community activations around the world. This energy will propel us forward as we navigate the current economic and political uncertainty, especially in the U.S. We will control what we can control, we will focus on continuing to deliver the high level of newness and product innovations our guests expect from Lululemon. I continue to feel confident in our Power of Three x2 strategy and our people who will continue to excite and engage with our guests and drive us forward in 2025 and beyond. We'll now take your questions.

Perfect. Thanks so much and congrats on a great quarter. I just wanted to focus, Calvin, on the modest U.S. revenue growth you're expecting for the year. Can you just elaborate a little bit around how you define modest, and should that be consistent throughout the year or any difference in cadence by quarter? And then just how you really arrive at that as the right level from here? Thanks a lot.

Thanks, Alex. I'll take the first and then I'll pass it over to Meghan to go specifically into breaking down the growth number for you. But as I sort of shared in Q4, consistent with what we saw throughout the year, our guests responded well to the newness that we offered through our assortment, and our business continued to sequentially get stronger on the back of that newness. And as we transitioned into Q1, our newness is back to being on par where it's been in the past as we indicated we would be and the guest has responded very well to a number of new product launches that I'm excited about can continue to build into future franchises from Glow Up, Daydrift, Be Calm, Shake It Out, as well as what lies ahead in our pipeline, which is very strong. And I shared just a few of those with you with the 10th year anniversary for Align coming up building on the Palazzo pant that she has responded incredibly well to, as well as offering a no front seam legging, which we know our guests have been asking for and to offer that within the Align franchise as an opportunity to celebrate the 10th anniversary. We're excited about that as a means for our high-value guests as well as new guests to acquire and bring in. That being said, we are operating within a dynamic macro environment that's really contributed to a cautious consumer, where we've seen material impact to traffic across the industry. While we've experienced some of these traffic trends, the guest who is visiting has responded very well to our newness in innovation. When we look at UPT, average order size, both of these are positive. So the guests coming in are responding to the newness. They're buying more, and it's having an impact. So those are very good indicators. And as we continue to flow the positive newness that we see throughout the year. As well as the activations, I want to touch on North America, in particular, in the U.S., we've started the year with a fantastic rhythm and cadence of very unique community-based activations. So overall, there's a very good energy across the teams in the business, and the guests are responding very well to the product and we're controlling and focused on what we can control. And I think we're well-positioned as these macro challenges soften moving forward. But I'll allow Meghan to just put a little bit of color to the numbers as well.

Hi, Alex. Regarding North America, we expect growth in the low to mid-single digits for the year, with the U.S. on the lower end and Canada higher. We aren't breaking down the quarters, but I can say that Q1 is not showing significant differences compared to Q4. As Calvin mentioned, we entered the quarter with a decrease in traffic due to macro factors affecting us. However, we are seeing strong performance from our new offerings, which we believe will serve us well as traffic conditions improve. It's also worth noting that the decline was sharper last year in the U.S. during Q2, so we're facing our largest growth rate from 2024 in Q1.

Thanks so much. Good luck.

Good afternoon, and thank you for taking my question. Calvin, I was hoping you could elaborate on your marketing strategy from here. Are you seeing the response that you're hoping to get as you build into some of these additional customer acquisition vehicles, such as Membership Madness Week? And then can you speak to what that's driving in terms of consumer acquisition and retention, specifically in the U.S.? Thank you.

Thanks, Brooke. Overall, I'm very encouraged by how we've started this year in the energy sector, particularly with our larger community-based events. Many of these efforts are designed to attract new guests while also fostering loyalty and retention among our high-value customers. We've launched various initiatives, including fun events celebrating our ambassadors competing globally, and we've seen thousands of guests register for Membership Madness. More than 15,000 guests have signed up for our community sweat events across North America, particularly in the U.S., with waiting lists exceeding 1,000 for some activities. These engagement figures are incredibly strong, and we're attracting many new guests as well. This is a unique aspect of our brand, as it allows us to integrate our community and ambassador campaigns effectively. We plan to enhance these efforts this year compared to last. The initial weeks of this year have shown a high pace of activations and strong engagement. Our social media efforts, including earned media and the positive impact from our campaigns, contribute to brand awareness. We believe this unique approach significantly impacts both retention and acquisition. I'm very pleased with our strong start this year and feel that we're effectively responding to market demands, with guests responding positively to new offerings. As Meghan mentioned, we're focusing on what we can control and preparing well for the rest of the year, especially if macro challenges begin to ease.

Great. And then for Meghan, can you elaborate on the plans that you have embedded in your guidance for tariffs this year? If tariffs were to widen to a broader set of geographies, what are your mitigation strategies right now? And what is the quantification of the current tariff impact under what you're seeing today?

Yeah. Absolutely. So in terms of tariffs, we've got approximately 20 basis points of a headwind embedded in our guidance, which is reflective of current actions on China and Mexico imports. Closely monitoring the environment. We'll continue to look across our cost structure as well as to pricing should the environment change. So definitely keeping a close eye on that.

Thanks so much.

Hi. Calvin, as you think about the effectiveness of the marketing and what you're seeing globally? I saw the new store in Tokyo, obviously London also. How are you planning for international go forward? And how do you think of the activations there? And then, Meghan, on the margins, the cadence of margins as we go through 2025, are there any puts and takes of what we should be mindful of? And just lastly, for the first-quarter sales growth guidance, are you currently within those rates now? Thank you.

Thanks, Dana. The activations I mentioned in the U.S. are indeed our primary global go-to-market strategy, which we customize based on market maturity. In the U.S., we have an opportunity to enhance our impact with larger activations in newer markets. We utilize our store base more effectively and build momentum by maximizing size and activation. Our approach generally involves leveraging local market communities, stores, educators, and ambassadors, with various initiatives worldwide, from events in Mainland China to our activities on World Mental Health Day in multiple markets where our ambassadors compete in global events. Recently, we participated in several Formula 1 races in Shanghai and Australia, featuring Lewis Hamilton as one of our latest ambassadors, and we plan to continue this across many activities. This is a distinctive aspect of our go-to-market strategy that we excel at, and our stores play a crucial role in this activation. We are still early in our optimization strategies and plans. If we look back over the past year and even just the last few quarters, we've optimized a store in Melbourne, which is performing remarkably well. You mentioned the store in Tokyo; we have exciting plans for that location. Japan is a significant growth market for us, and we also see great potential in South Korea. The Regent Street store that just opened is doing very well, thanks to impressive activations tied to Saul Nash and Fashion Week, as well as the initiatives our store teams have executed. This approach is central to how we activate our brand, and you'll see more of it as we continue these optimizations, which effectively attract local guests and international tourists eager to experience our brand and products. We are thrilled about the momentum we are seeing both internationally and in North America.

Great. And I'll take the margin piece. So in terms of op margin, we are guiding to a 100 basis points decline for the year. At the highest level, I just call out FX and tariff headwinds are a little bit over 50% of that decline in op margin. Then we've got some investments in the business to add back some of the expense areas we pulled out in '24. So I would view those three buckets as incremental headwinds unique to this year. And then we also are continued to invest into our Power of Three x2 roadmap with our confidence on the long-term. And in terms of quarters, we've got a little bit more pressure as we called out in terms of Q1. It's also related to Q1 being our highest revenue growth rate in '24. So we've got 120 basis points decline in op margin there. Pretty similar story in terms of SG&A, so 120 basis points deleverage in Q1 and then 40 basis points to 50 basis points for the year. So I think that's the color I'd offer there. And then you also had a question, Dana, on quarter-to-date trends. We're not breaking out specifics on quarter-to-date trend but I would share we're about 50% through the quarter and looking at current trend of business and mindful of the environment, we did guide to 6% to 7% growth for the quarter with one point also of an FX headwind embedded in that.

Thank you.

Thank you. Good afternoon. Have you included any improvement from the choppy first quarter traffic performance in North America in the full year guidance? And are there ways to be more aggressive on some of these marketing activations to drive stronger traffic as we move through the year?

Hi, Lorraine. I would say our balance of year outlook reflects similar trends to Q1 at this point in time. I'll let Calvin chime in on marketing.

We're constantly experimenting and learning, seeking new opportunities to invest in marketing while staying within our guidance. I'm very satisfied with the current response from our guests and excited about the upcoming campaigns. The 10th anniversary of Align will be a significant global activation, supported by a wide range of new products designed to engage both new and high-value guests, providing reasons for them to refresh their Align wardrobe. We always aim to keep pushing forward and investing, and I'm happy with the positive momentum we've seen at the start of this year. We're committed to maintaining this proactive approach and supporting our product pipeline and the upcoming innovations for our guests.

Thank you.

Great. Thanks. Calvin, could you explain the sales metrics in the U.S. in light of the recent product introductions? How confident are you in this year's product pipeline, considering first quarter sales trends are consistent with the fourth quarter, even with the softer macro environment you mentioned? And Meghan, how comfortable are you with the current content and composition of inventory, and what markdowns have you factored into the gross margin guidance?

Hey, Matt. So in terms of sales in the U.S., we did come into the quarter and saw a negative traffic trend industry-wide, which is impacting us. Similar conversion, I'd say, to what we experienced in Q4, and then we've seen an improvement in AOV and specifically UPTs, really a reaction to the newness in our assortment. And again, feel that positions us well for when traffic rebounds. So Q1 trends for the U.S. not materially different than Q4. And then in terms of inventory, I'm pleased with the level and composition of the inventory. We offered some color on high-teens growth, and it's really related to just the cadence of our inventory as we move through this year, being in a good in-stock position in core, bringing in newness, and we also are expecting flat markdowns for both Q1 and the full year at this point in time.

Great color. Best of luck.

Hi. Thanks for taking my question. Question for Meghan. I was hoping you could just elaborate a bit on your SG&A philosophy. With the guidance you gave for deleverage of 40 basis points to 50 basis points this year, if we see better sales, would we expect it to still be in that range or would you put more into SG&A or on the flip side, if we have sales come in weaker, maybe just elaborate on some of the areas where you might have some flex? Thank you.

Yes. Thank you. So as I mentioned, we do have a headwind in FX for the year and in terms of how that impacts SG&A, it's about half of the 40 basis points FX headwind, so 20 basis points impacting SG&A. And then also, as I mentioned, we are still investing behind our Power of Three x2 roadmap. So, continuing to support our international strategy, our store expansion strategy across the globe, marketing and brand, as Calvin mentioned, and going after that unaided brand awareness piece. And then another one I'd mentioned was just tech in terms of foundational investments in data analytics. I think it will depend on the environment and the business dynamics in terms of where SG&A moves with either increasing or decreasing sales. We always have contingencies across the business, both on the upside and downside and will depend on the momentum we're seeing in the business and the current environment in terms of how we approach that.

Great. Thanks so much.

Thank you very much. Meghan, regarding the growth in the Americas compared to international markets, you mentioned a low-to-mid-single-digit forecast for the Americas. This suggests that international growth will likely be significantly lower than what you projected for 2024. Can you provide some insight into where you might be noticing a slowdown internationally? Are there specific markets contributing to this, and what assumptions are you basing this on? Additionally, I'd like to ask about your investment levels. You mentioned foundational investments, strategic investments, and marketing. Could you elaborate on how adaptable your cost structure is in case of a more challenging macroeconomic situation? What would margin progression look like? Thank you.

Yeah. So in terms of revenue by geography, as I said, we're offering color on Americas low-single digit to mid-single digit for the year and China 25% to 30%, Rest of World approximately 20%. So we're being thoughtful in our planning, looking at current trends of the business and the forward outlook in terms of the environment. So a little bit below what's embedded in our five-year CAGR, but we remain ahead of schedule and really pleased and committed to that long-term target there. And then in terms of flex across the P&L, as I just mentioned, we do have a number of contingency levers dependent on business outlook. At this point in time, I would say we remain really focused on the long-term and driving into our long-term opportunity while navigating some near-term headwinds, particularly with FX and tariffs.

Thank you for taking my question. Meghan, you initially projected gross margin to be flat for the year, but it ended up increasing by 65 basis points. In the U.S., it didn't perform as you expected. Can you elaborate on what diverged from your expectations for the year? Also, as you look ahead to 2025, do you still have that cautious outlook, and where do you see that reflected in your guidance for gross margin, sales, and SG&A?

Yeah. Thanks, Michael. So I would say in terms of what played out differently, top-line, I think we saw a little bit of an outperformance as we moved to close out the year, which would provide a little bit of leverage in terms of gross margin. We also mixed a little bit differently by category and saw an IMU benefit from that, as well as some reduced freight rates impacting our gross margin in '24. So believe we're well-positioned in our guidance in terms of '25. The mix of business could come out different there as well as the top-line outlook could impact our leverage point. But I would say at this point in time, our current view on mix of business and revenue outlook is embedded in our guidance color.

Good afternoon. Thanks for taking my questions. Meghan, it looks like marketing went up to about 5% of sales this year. It's still below some of your bigger peers. I think it's up about 50 basis points year-over-year. How do you think about marketing within fiscal '25 and also long-term? Is this something, given all the activations that Calvin talked to earlier, that you could flex up to drive faster sales in the Americas?

Yeah. So marketing was an area where we navigated last year and some of the challenges we had with newness and looked across our P&L investments, we maintained our investment in marketing, and we did see our penetration of sales tick up a little bit to that 5% range. That's what we're expecting as we move into '25. It is definitely an area we were closely monitoring. We've got a lot of excitement in terms of product newness and marketing activations as we move throughout this year. So dependent on business trend, it's an area we would look to flex if that's appropriate.

Got it. Thank you.

Hey. Thanks, guys. On the traffic slowdown, I think you specifically mentioned the U.S., but can you talk about what you saw in the other regions, including Canada, including China, international, or Rest of World? And anything within the U.S. that you could call out regionally. Obviously, there's been some unfavorable weather in the first quarter. Curious if you're seeing any impact from that. Thanks.

Yeah. So in terms of traffic, I would say the notable trend we saw was that shift in the U.S., nothing materially different in terms of either Canada or the international markets. I would call out just the difference in Lunar New Year timing, the shift in the timing this year does have a little bit of a headwind on Q1 in terms of our China trends in overall international. And then in terms of U.S. regional, we aren't seeing any meaningful differences regionally, and in terms of weather, I would say, really focus on what we can control.

Thanks. Good luck.

Thank you.

Thank you for taking my question. Regarding the U.S. market, is what you're observing more widespread? Are the trends leaning more towards women's or men's products? I'm also curious about your thoughts on this. Additionally, Calvin, considering your comments about innovation and new products, it seems like you're not anticipating any improvement in the North American trend moving forward. Shouldn't we expect some improvement in the U.S. as the year goes on, given the merchandise flow you mentioned?

Thanks, Ike. In terms of difference between the men's and women's business, we haven't seen any material notable change from the fourth quarter which we talked about with women's up 6%, men's up 12%. The big opportunity in missed newness last year was really in our women's business, and we've gone back to at par on that, and she has responded, as I mentioned, across some of those metrics I shared, UPT, average order size. So I think that is definitely a positive for us, and being back in a traditional mix of newness and innovation across the assortment for her. We are seeing good results to that. And I'll let Meghan reference the second part.

Yeah. So we are guiding 6% to 7% in Q1 and then 7% to 8% for the full year. The Americas came in at 3% growth for '24, and we offered color low-single digit to mid-single digit. So I would say that range captures potential uptick there, but being thoughtful in terms of how we're planning the business given some of the uncertainty this year.

Fair enough.

Great. Thank you so much. Would it be possible to clarify on the square footage growth? How much square footage growth you're planning for the U.S. this year? And also, how much square footage growth you're planning for China? Thank you.

We're not breaking out the specifics on square footage growth, but what I can offer is we've got 40 to 45 net new openings for the year, square footage growth of 10%, which is in line with our Power of Three x2 target of low-double-digits. North America is about 10 to 15 openings. Within that, the balance is international. The majority of those would sit in China, and we'll continue to keep you updated as we move throughout the year.

Got it. Are you upsizing stores in the U.S. this year?

Yeah. We continue to pursue our optimization strategy. So we had a total of globally 39 optimizations in 2024, and we're currently planning 40 for 2025 globally.

Got it. Thank you so much.